The end of 2008 saw two developments in the mid-to-large-cap oil and gas sector that serves as signposts for year ahead. On the one hand, Oilexco, which until at least mid-December had a market value large enough to rank it alongside the FTSE 250 players, was forced to put its subsidiary that owns its key UK north sea fields into administration. That was because its bankers refused to extend its debt beyond the roughly $700m (£461m) already owed. On the other hand, Russian-focused FTSE 250 constituent Imperial Energy was indeed finally taken over by Indian state-owned oil company ONGC for the 1,250p cash per share originally offered in the summer, even though the oil price has more than halved since - from well over $100 a barrel to around $40.
This flags up two points for the coming year. First, no matter how attractive a company's asset portfolio might look, banks cannot be relied upon for any fresh funding - no matter how incremental or short term. Returning to Oilexco, for instance, it owned stakes in significant newly producing assets and also had the as-yet undeveloped Huntingdon prospect on its to-do list - touted as the most promising discovery in the north sea of recent years. Secondly, state-owned concerns from south and east Asia remain willing to put up cash for attractive assets. That reflects a long-term strategic national need for energy resources rather than the market's attempts to apply value on the basis of the oil price for any given day.
Taken together, these two trends imply that mid-cap oil and gas plays, forced to put development plans on ice due to lack of near-term financing, and with share prices concomitantly depressed, could offer happy hunting grounds for cash-rich state-owned predators from the east. SOCO, Salamander and Premier Oil all have significant acreages with existing production in south and east Asia, and so present tempting targets. In terms of debt burdens actually destroying companies, however, the next after Oilexco is unlikely to be found among our FTSE 350 oil and gas plays. Indeed, it is worth noting from the current crop that very few of them have any significant debt that needs refinancing in the near term.
Ironically, it is one of the most favoured companies in the sector, Tullow Oil, that looks the most exposed - with some $400m needing to be rolled over or retired in the coming year. Still, it's likely that Tullow will survive even if it has to resort to a rights issue - the sum is less than a tenth of its current market value. And while oil at just $40 a barrel means that the City is unlikely to be too excited by many near-term oil discoveries, the company's prolific Ugandan and Ghanaian licences will remain the big story in the FTSE 350 sector in the coming year.
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